Guaranteed cost insurance is a popular choice for workers’ compensation coverage due to its stability. However, like any insurance model, it has its pros and cons. Before choosing this option, it’s important to weigh whether the stability outweighs the potential for savings with other insurance models.
In this article, we’ll explore the key benefits and challenges of guaranteed cost insurance. We will compare it to other models to help you determine whether this option aligns with your company’s goals.
The Appeal of Predictable Premiums
One of the primary benefits of guaranteed cost insurance is the predictability it provides. Businesses know their premium upfront, which is based on estimated payroll and classification codes. Once established, this premium remains constant throughout the policy term, regardless of how many claims are filed.
According to Prescient National, this insurance model is straightforward and is typically used by many businesses for workers’ compensation programs. The insurer assumes the risk of fluctuating claims costs, and policyholders benefit from a steady premium. This contrasts with other models where premiums can vary based on claim frequency or severity, making budgeting more challenging.
Forbes mentions that financial challenges are a major reason many new businesses fail. 38% of startups close because they run out of cash or can’t secure more funding. This highlights just how crucial solid financial management is for the survival and growth of young companies.
As businesses increasingly value stable financial planning to minimize unpredictability, guaranteed cost insurance emerges as an attractive choice. The ability to forecast costs allows for better budgeting and financial management, reducing the risk of unexpected premium spikes due to claims. However, predictability comes at the expense of flexibility, which might limit savings potential.
What is guaranteed cost insurance in workers’ comp?
Guaranteed cost insurance provides a stable premium based on estimated payroll and classification codes, regardless of claims history. This predictability simplifies budgeting but lacks flexibility. It’s ideal for businesses that prefer fixed costs but may not benefit from safety improvements.
Limited Financial Incentives for Safety Improvements
While guaranteed cost policies provide stability, they don’t offer a direct financial incentive for improving workplace safety. Since the premium remains the same regardless of claims history during the policy term, businesses that invest in safety programs won’t see premium reductions. This can be a downside for companies with strong safety records, as they won’t benefit financially from their low claims rate.
In contrast, loss-sensitive programs tie premiums to claims, meaning businesses that reduce workplace accidents may pay lower premiums over time. For those committed to safety improvements, guaranteed cost insurance may feel like a missed opportunity.
CFO Dive states that while loss-sensitive policies can help lower premiums, they come with added risk. To cover that risk, insurers require businesses to provide collateral. Companies usually do this by using a bank letter of credit (LOC) or placing cash in escrow.
How does guaranteed cost insurance compare to loss-sensitive models?
Guaranteed cost insurance offers stable premiums but doesn’t adjust based on claims, unlike loss-sensitive models that provide financial incentives for reducing workplace accidents. Loss-sensitive plans can lower premiums over time with fewer claims but require businesses to manage risk more actively. Each model suits different business needs and risk tolerances.
The Simplicity of Guaranteed Cost vs. Complex Alternatives
Another key advantage of guaranteed cost insurance is its simplicity. The premium calculation is straightforward, based largely on payroll and classification codes, making it easy to understand.
Investopedia mentions that it’s worth noting that workers’ compensation costs vary significantly by state. In California, the average cost is 40 cents per $100 in payroll for low-risk jobs and $33.57 for high-risk jobs. Meanwhile, Florida averages 26 cents for low-risk and $19.40 for high-risk jobs. New York’s rates are 7 cents for low-risk and $29.93 for high-risk jobs.
More complex options like retrospective rating or deductible programs can require ongoing premium adjustments based on claims and incurred losses. For smaller businesses or those without dedicated risk management teams, the straightforward nature of guaranteed cost insurance can be a major benefit.
This makes sense as the Office of Advocacy notes that in the United States, there are over 33 million small businesses. These businesses are vital to the economy, employing 61.7 million people. That accounts for 46.4% of all private sector employees.
However, the simplicity of guaranteed cost insurance might come at a higher long-term cost if claims are low. This is because it doesn’t offer the potential savings of loss-sensitive plans.
Who Should Consider Alternative Insurance Models?
Guaranteed cost insurance is a good fit for businesses with a stable claims history that prioritize predictable expenses and strict financial budgeting.
Companies with stronger risk management or those willing to take on more risk may want to explore alternatives like retrospective rating or deductible plans. These models allow businesses to benefit directly from their safety initiatives by adjusting premiums based on claims.
While these options carry more financial variability, they can result in significant savings for businesses with low claims. Ultimately, the decision comes down to your company’s risk appetite and how involved you want to be in managing workers’ compensation costs.
Who should choose guaranteed cost insurance?
Guaranteed cost insurance is best for businesses with a stable claims history that value predictable expenses and straightforward budgeting. Companies with strong risk management systems or those ready to embrace variability for potential savings may prefer alternative models. Evaluate your company’s financial stability and risk management approach before deciding.
Guaranteed cost insurance offers predictable premiums, simplifying budgeting but it may not always be the most cost-effective choice. Businesses with strong safety records might find better value in loss-sensitive models, which lower premiums with fewer claims.
Choosing between guaranteed cost and other insurance models depends on your company’s risk tolerance, financial goals, and desired control over workers’ compensation costs. Evaluate your business’s safety performance and financial strategy to select the best model for your needs.